China leverage rising at ‘alarming pace’: central bank official

Property buildings are seen against the dawn sky in Beijing, China, April 25, 2017. REUTERS/Stringer

China’s level of leverage is rising at an “alarming pace”, particularly in the finance sector, a senior central bank official said in a commentary, amid growing concern by the country’s senior leaders over financial security.

The official Xinhua news agency on Monday cited Xu Zhong, head of the People’s Bank of China’s (PBOC) research bureau, as saying the country needed to deleverage at a “proper pace” to reduce financial sector debt and avoid systemic financial risk.

“China’s overall leverage level is reasonable but is rising at an alarming pace, especially in the financial sector,” Xu said. The original commentary was published in business journal Caijing Magazine.

Xu said high levels of stimulus spending from government paired with poor corporate management and financial supervision were key factors causing rising levels of leverage, Xinhua said.

He added the government should stick to “prudent and neutral” monetary policy, reduce emphasis on economic growth targets, and improve corporate governance so authorities did not have to step in so frequently to help companies out.

Last week President Xi Jinping called for increased efforts to ward off systemic risks and help maintain financial security. Analysts say financial risk and asset bubbles pose a threat to the world’s second-largest economy if not handed well.

Former Chinese finance minister Lou Jiwei also said last month that high leverage was the biggest risk facing China’s economy because debt has piled up despite government efforts to deleverage.

The Bank for International Settlements warned last year that excessive credit growth in China is signaling an increasing risk of a banking crisis in the next three years.

China watchers have generally expected another modest increase in short-term interest rates by the central bank around June, following similar moves earlier this year, but see no aggressive or politically sensitive tightening moves ahead of a major leadership transition in the country later in the year.

Still, the People’s Bank of China (PBOC) and other regulators have ramped up the pressure on a number of fronts as they look to contain financial risks after years of debt-fueled stimulus.

In particular, regulators are targeting riskier forms of financing which often interconnect the official and shadow banking sectors and other financial firms such as brokerages and trust companies.

Local governments have also rolled out a series of measures to cool heated housing markets, with mixed results so far. But again, tapping the brakes too hard risks a blow to economic growth.